Directors need to be aware of their duties, says Bob Bailey, Midlands chair of R3, the Association of Business Recovery Professionals, and partner at Baker Tilly.
POOR management is increasingly likely to be responsible for business failure than any other single factor, as R3 surveys continually highlight. For more than ten years, the proportion of businesses going to the wall because of management weakness of one type or another has grown steadily.

It is particularly sad because this is largely preventable. Better management education and a greater willingness to seek help when times are tough could see many more companies - and jobs - saved.

But what is frightening is the number of directors who do not realise the extent of their liabilities when their business is in trouble. Large numbers of directors are leaving themselves open to disqualification and even criminal proceedings, just by being ignorant about their legal duties and responsibilities. And this is just as true of fairly substantial organisations as it is of very small ones.

It can often be the case that despite evident concern, even anxiety, about the state of their businesses, a high proportion of directors can have little or no idea of the personal effects that a potential corporate insolvency can have.

It should be noted that non-executive directors owe the same duty of care to creditors and shareholders as their executive colleagues, and that their personal liability may be higher if they have a greater than average level of experience and expertise. All directors are affected, not just those with a stake in the business.

When a company is insolvent, any irregularity, however inadvertent, may result in the directors of the company being found personally liable for losses arising out of it. And many do not realise that a personal guarantee is just that - a call on personal funds.

Taking on too high a level of personal guarantees can expose directors to huge financial losses should a business collapse. A significant number of personal bankruptcies come about because personal guarantees supplied by directors are called in following company failure.

Even directors appointed to publicly listed organisations receive little or no automatic information concerning their liabilities when they first join the board. It's no wonder, then, that they fail to consider their importance, among all the other details they have to absorb in a new role.

In short, it is up to every director to understand the company's financial position and to take action if insolvency is on the cards. Better education would help, but it falls to each individual to make sure they are familiar with what is required of them.

The legal consequences of ignorance can be harsh - disqualification for between two and 15 years, with no guarantee that this would be the only penalty.

That should be incentive enough to do some research and take professional advice.